TAX RATES AND ALLOWANCES
The following tax rates and allowances are to be used in answering the questions.
Individual income tax
Entrepreneurs who receive production or operations income derived from private industrial or commercial operations
Allowance per annum RMB42,000
Monthly personal allowance for a China local RMB3,500
Additional allowance for expatriate employees RMB1,300
Allowance each time for individual service income, income from manuscripts, royalties and rental of property
RMB4,000 and below RMB800
Over RMB4,000 20%
Income from:
Manuscripts, royalties, interest, dividends, rental of property,
transfer of property, incidental income and other income 20%
Donations of individuals
Limited to: 30% of the taxable income; or
100% if the donation is made to certain funds approved by the government
Note: The above rates are based on the pilot rules published by 30 September 2017. The new rules issued from 1 October 2017 onwards are not examinable in the 2018 exams.
(a) GKL Ltd engages in simple processing in Shenzhen and exports the finished goods to its overseas affiliates for further sale on to the ultimate customers. GKL Ltd made a loss in 2017. The tax bureau has challenged GKL Ltd’s transfer pricing policy
Required:
State ANY TWO transfer pricing methodologies which the tax bureau can use to assess the profit of GKL Ltd.
Note: No marks will be given for stating ‘other method’.
GKL Ltd
The transfer pricing methodologies the tax bureau can use are:
– the comparable uncontrolled price method;
– the cost plus method;
– the resale price method;
– the profit split method; and
– the transactional net margin method.
(b) CD Ltd qualifies for a reduced enterprise income tax rate of 15%. CD Ltd holds overseas investments in two subsidiary companies, T Ltd, its Turkmenistan subsidiary and U Ltd, its United States subsidiary. In 2017, CD Ltd received the following income from these overseas subsidiaries:
CD Ltd – Enterprise income tax (EIT) for 2017
(c) STuv Ltd is a value added tax (VAT) general taxpayer. In 2017, it paid a royalty of RMB1,000,000 (net of all China taxes) to its Singapore parent company (a non-China tax resident without an establishment in China).
Required:
(i) Calculate the value added tax (VAT) and enterprise income tax (EIT) (withholding tax) to be withheld and paid by STuv Ltd in respect of the royalty.
Note: Under the VAT pilot programme, a royalty is a type of cultural and innovation service.
(ii) Calculate the cost of the royalty to STuv Ltd for the purposes of its EIT accounting and EIT liability.
Note: You should ignore surtaxes on VAT and any treaty incentive available on royalty income.
STuv Ltd
(i) Value added tax (VAT) and enterprise income tax (EIT) to be withheld
(a) Ten-day Hotel is a value added tax (VAT) general taxpayer. Susan received the following bill in respect of her stay at Ten-day Hotel:
Susan/Ten-day Hotel
(i) A mixed sale is a sales transaction which involves both goods and services or services under different tax categories.
A composite sale is a principal sale transaction with an ancillary component(s) which is/are under different tax categories.
The sale of a soft drink from the mini bar is a composite sale.
(ii) The free breakfast is not a deemed sale of services. The hotel is not providing breakfast free of charge since Susan has to pay the accommodation charges for her stay before she can get the breakfast.
[Tutorial note: This is a bundled sale.]
(iii) Ten-day Hotel output value added tax (VAT)
(b) O-source Ltd, which provides information technology outsourcing services to customers, is a value added tax (VAT) general taxpayer. The following information relates to O-source Ltd’s VAT position in 2017:
O-source Ltd
(i) Output value added tax (VAT)
(ii) Input VAT
(a) Elsa Chen set up a proprietorship business selling handcrafts via an e-commerce platform. The transactions of her business in 2017 were as below:
Using a proprietorship business
Individual income tax (IIT) for 2017
Alternative method for calculating taxable income:
Total income after tax in 2017
(b) Elsa Chen converted her business into a limited company, EC Hand Ltd, on 1 January 2018. EC Hand Ltd qualifies for the small profit enterprise income tax (EIT) incentive. Elsa will distribute all of the profits of EC Hand Ltd as a dividend.
Required:
Assuming that the transactions of EC Hand Ltd in 2018 are the same as those of Elsa’s proprietorship business in 2017:
(i) Calculate the enterprise income tax (EIT) payable by EC Hand Ltd and the amount of the dividend payable to Elsa Chen in 2018.
(ii) Calculate the individual income tax (IIT) payable by Elsa Chen in 2018.
(iii) Calculate the total after-tax income receivable by Elsa Chen in 2018.
Note: You should assume that the 2017 tax rates will continue to apply in 2018.
Using a company
(i) Enterprise income tax (EIT) for 2018
(ii) Individual income tax (IIT) payable by Elsa for 2018
(iii) Total income after tax in 2018
(a) Uanke Ltd is a property developer which developed a shopping mall and sold it to JD-Mart in April 2017. Details of the sale and the related costs are summarised below:
Uanke Ltd – land appreciation tax (LAT) on sale to JD-Mart
(b) JD Mart plans to sell the shopping mall for RMB250 million in October 2018. Details of the sale and the related costs are forecast to be as below:
JD-Mart
(i) Land appreciation tax (LAT) on planned sale
(ii) Estimated profit on sale for enterprise income tax (EIT)
(a) Mr Zhang has a household and family in China. He was seconded to work in Zambia for a six-year period from 1 January 2012 and has not returned to China since his secondment. Mr Zhang’s remuneration for December 2017 is summarised below:
Mr Zhang
(i) Mr Zhang will continue to be a China tax resident during the period of his secondment. He habitually resides in China due to household, family and economic benefit reasons. His stay in Zambia is due to the reasons of work only.
(ii) Individual income tax (IIT) in December 2017
(b) Ms Yang, a US citizen, has been working in Shanghai for SX Express, which is listed on the China Stock Exchange, since January 2016. Her income slip for July 2017 shows the following:
Ms Yang – Individual income tax (IIT) in July 2017
Sun Ltd is a solar energy equipment manufacturer operating from Ningxia, which qualifies for both the Central and Western Region and high and advanced technology enterprise income tax (EIT) incentives.
Sun Ltd’s accounting profit before tax for 2017 is RMB85,000. Except where stated otherwise, the following items have all been included when computing this accounting profit:
(1) Goods costing RMB1,250,000, which were sold in December 2017 for RMB1,350,000, were returned by the customer in January 2018 due to defects. The return of these goods was not recorded in 2017.
(2) Inventory was valued under the weighted average cost method. If the inventory had been valued under the last in, first out method, the profit would have been increased by RMB280,000.
(3) In 2016, Sun Ltd borrowed RMB100,000,000 from its affiliates in Shanghai at an interest rate of 6% per annum. Except for this loan, Sun Ltd did not have any other loans from related companies. Sun Ltd has not prepared any transfer pricing documentation in relation to this loan. In 2017, the weighted average equity of Sun Ltd was RMB30,000,000. The market interest rate from financial institutions on similar loans is 6% per annum.
(4) A receivable of RMB45,000 was written off as a bad debt because the debtor was bankrupt.
(5) A specific provision of RMB360,000 was made in respect of a receivable due from Customer YY which announced its bankruptcy in January 2018.
(6) A donation of solar energy equipment was made to a school. This equipment had a cost of RMB40,000 and its normal selling price is RMB75,000. The cost of the equipment was booked as part of cost of sales. No record was made of the donation.
(7) In addition to the donation of solar energy equipment (as in (6) above), Sun Ltd donated cash of RMB18,000 to the China Red Cross.
(8) New equipment, which qualified for the EIT energy and water saving equipment incentive, was acquired for RMB1,500,000. The equipment was put into use in October 2017, but no accounting depreciation was booked in the 2017 accounts. The equipment has an economic life of five years and no residual value. Sun Ltd has not applied to use accelerated depreciation for this new equipment.
(9) Sun Ltd is an advanced-type small and medium size company which qualifies for the additional research and development incentive. In 2017, Sun Ltd incurred qualifying research and development expenses of RMB1,374,000.
(10) Included in wages and salaries is a provision for a bonus of RMB300,000, which was paid in April 2018.
(11) Also included in wages and salaries is a provision for employees’ stock option incentives with a grant date in January 2017 of RMB680,000. None of these stock options were exercised in 2017.
(12) Except for the new equipment (as in (8) above), Sun Ltd’s fixed assets were all purchased in December 2015 for RMB6,000,000. Depreciation is calculated under the straight line method for accounting purposes using an economic life of five years and no residual value. Sun Ltd qualifies for the accelerated depreciation tax incentive in respect of these assets and can use the sum-of-years-digit depreciation method for tax purposes.
(13) Sun Ltd received a specific financial subsidy of RMB500,000 for Project DD in 2010. The total amount spent on the completion of Project DD by the end of 2017 was RMB480,000.
(14) Sun Ltd received another specific financial subsidy of RMB720,000 for Project SS starting in 2017. The expenses incurred for Project SS in 2017 amounted to RMB232,000.
(15) Sun Ltd received a general purpose financial subsidy of RMB186,000 in 2017.
(16) Sun Ltd incurred promotion and advertising expenses of RMB3,200,000 in 2017. Sun Ltd’s sales for EIT purposes in 2017 totalled RMB25,000,000. The amount of excessive promotion expenses not deductible in 2016 were RMB400,000.
(17) Dividend income of RMB50,000 was received from a subsidiary in Xinjiang. The Xinjiang subsidiary was exempt from EIT in 2017.
(18) Interest received on government bonds was RMB30,000.
(19) Interest received on corporate bonds was RMB11,500.
(20) In August 2017, a dividend of RMB21,000 was received from an A-shares investment made in May 2017.
Required:
Calculate the enterprise income tax (EIT) payable by Sun Ltd for the year 2017, assuming that Sun Ltd has made all relevant applications and/or reports to the tax authorities.
Notes:
1. You should start your computation with the net profit figure of RMB85,000 and list all of the items (1) to (20) as referred to in the question, identifying any item which does not require adjustment by the use of zero (0).
2. You are not required to make adjustments for any of the above items for accounting purposes.
3. You should ignore value added tax (VAT) on any deemed sales or abnormal losses.
Sun Ltd – Enterprise income tax (EIT) for 2017
